Introduction

The United States is both the world’s largest foreign direct investor and the largest beneficiary of foreign direct investment (FDI). But like every sovereign country, it has sought to temper its embrace of open markets with the protection of its national security interests. Achieving this balance, which has shifted over time, has meant placing certain limitations on overseas investment in strategically sensitive sectors of the U.S. economy.

The Committee on Foreign Investment in the United States (CFIUS) was established in 1975 to review foreign acquisitions of U.S. firms that could pose a national security threat. The federal government reviews only a small fraction of the hundreds of foreign acquisitions each year. However, concerns are mounting in Washington about the potential security risks of Chinese investment, an issue President Donald J. Trump has made a centerpiece of his administration, and some lawmakers are hoping to strengthen CFIUS’s mandate. Meanwhile, countries from Australia to the United Kingdom are increasing their scrutiny of foreign investment.

How does the United States benefit from foreign investment?

Washington has traditionally led international efforts to bring down barriers to cross-border capital flows with the goals of expanding investment opportunities for U.S. multinational businesses and creating a more stable and efficient international system. The United States relies greatly on foreign inflows to compensate for a shortage of savings at home and it routinely ranks among the most favorable destinations for foreign direct investors. Foreign direct investment—the ownership or control by a foreign entity of 10 percent or more of a domestic enterprise—plays a significant and growing role in the U.S. economy.

According to research by the Department of Commerce, foreign investment accounts for some twelve million U.S. jobs, or 8.5 percent of the total labor force. Foreign firms also pay on average higher salaries than their domestic competitors. Moreover, foreign firms are disproportionately involved in manufacturing.

What are the concerns over foreign investment?

Concerns with foreign transactions are typically associated with mergers, acquisitions, and takeovers of domestic firms rather than new investments, known as greenfields. U.S. lawmakers, much like their peers around the globe, have passed legislation that restricts or authorizes reviews of foreign deals that could cause significant outsourcing of jobs, the sharing of sensitive technologies, or impairment of critical infrastructure.

But many economists warn that imposing burdensome restrictions on FDI inflows could inspire retaliatory policies by other nations. To avoid this, the thirty-four members of the Organization for Economic Cooperation and Development (OECD), as well as twelve nonmember states, have signed a nonbinding commitment to treat foreign-controlled firms on their territories no less favorably than domestic enterprises. Governments under this agreement are, however, provided considerable latitude to exempt sectors of their economies deemed essential to national security. As shown in Table 1, countries define “critical infrastructure” in various ways [PDF].

Source: OECD.

International investment experts Alan P. Larson and David M. Marchick, who coauthored a 2007 Council Special Report on the subject, say that state ownership of multinational firms is often benign. However, they note that concerns arise “when the foreign company’s decisions become an extension of the government’s policy decisions rather than the company’s commercial interests.” The authors cite as a cautionary example a move by Russian energy giant Gazprom in 2006 to cut gas supplies to Ukraine, which some Western observers considered a politically motivated decision.

More recently, leaders in Europe and the United States have raised concerns about investments by large Chinese firms. The Trump administration’s inaugural National Security Strategy warned that the “national innovation base” must be protected from Beijing’s attempts to gain control of critical companies and technologies.

How has the review of foreign investment involved?

Federal oversight of foreign investment has evolved over time, often in response to changing economic and security conditions. President Gerald Ford created CFIUS in 1975 amid congressional unease with growing investments by members of the Organization of the Petroleum Exporting Countries, or OPEC, in the United States, which many policymakers saw as potentially suspect. The interagency committee was charged with coordinating U.S. policy on foreign investment and reviewing transactions that could have significant consequences for U.S. interests.

However, in the ensuing years, many in Washington felt the oversight body was falling short of its obligations. In 1988, Congress strengthened the CFIUS review process by passing the Exon-Florio amendment to the Defense Production Act of 1950. Much as in the previous decade, the reform stemmed from concern with growing foreign investment—this time Japanese—in sensitive U.S. industries, including a bid by computer giant Fujitsu to purchase U.S.-based computer chip maker Fairchild Semiconductor.

The president was granted far-reaching authority to block a foreign acquisition on ‘national security’ grounds.

Exon-Florio granted the president far-reaching authority to block a foreign acquisition on “national security” grounds, broadly defined. Executive decisions do not require congressional approval and cannot be judicially reviewed. President Ronald Reagan, in turn, delegated to CFIUS the power to administer Exon-Florio, though the president retained ultimate decision-making authority.

“CFIUS was transformed from a purely administrative body with limited authority to review and analyze data on foreign investment to one with a broad mandate and significant authority to advise the president on foreign investment transactions and to recommend that some transactions be blocked,” explains [PDF] the Congressional Research Service.

What changed after the Dubai Ports World scandal?

The CFIUS process was amended most recently by the Foreign Investment and National Security Act of 2007 (FINSA), which passed in the wake of the Dubai Ports World (DPW) scandal. In March 2006, amid a flurry of U.S. political opposition, the Dubai-based, state-owned firm scuttled its bid to acquire control of major U.S. port operations. Many in Congress said that the controversial deal would increase the risk of a terrorist attack on the United States. President George W. Bush and CFIUS had previously approved the transaction.

FINSA provided Congress greater oversight of CFIUS and expanded the legal meaning of “national security” to include critical infrastructure. The act requires CFIUS to investigate all foreign investment deals in which the overseas entity is owned or controlled by a foreign power, irrespective of the nature of the enterprise. According to some experts, this shifted the burden of proof from CFIUS to foreign firms, which must show they do not present a security risk.

How does the CFIUS review process work?

CFIUS operates under the discretion of the president and is chaired by the secretary of the Treasury. It includes the heads of the following departments: Commerce, Defense, Energy, Homeland Security, Justice, and State, as well as the U.S. trade representative and director of the Office of Science and Technology Policy. Several other offices also contribute: the Council of Economic Advisers, Homeland Security Council, National Economic Council, National Security Council, and Office of Management and Budget. In addition, the director of national intelligence and the secretary of labor are nonvoting, or ex officio, members.

CFIUS reviews every merger, acquisition, or takeover resulting in “foreign control of any person engaged in interstate commerce in the United States.” Transactions not covered are those conducted “solely for the purpose of investment” or where the foreign investor “has no intention of determining or directing the basic business decisions of the issuer.”

Since the creation of CFIUS, presidents have only blocked deals on five occasions.

Prior to a formal, voluntary filing, the committee encourages parties to a foreign deal that may have security implications to consult with CFIUS staff confidentially to identify and address potential concerns. Once a formal notification is submitted, CFIUS reviews the proposed deal for up to thirty days, during which time it can request additional information and provide feedback to the parties. Most reviews conclude in the initial period; the few that raise concerns trigger a second, forty-five-day investigation. CFIUS and the transacting parties may negotiate a mitigation agreement to address any national security concerns. After the investigation period, the committee may make an adverse recommendation to the president, who then has fifteen days to make a decision.

Regulatory experts say the committee’s work is “intellectually honest” and meticulous. “It’s like a full physical, performed by a battery of doctors that run every conceivable test,” said David Fagan, law partner at Covington and Burling LLP, a Washington-based firm that focuses on advising clients on CFIUS-related issues.

Only the president has the authority to block a transaction, but two conditions must be met beforehand: the president must have “credible evidence” that the deal will impair national security and must determine that existing U.S. laws are insufficient to safeguard national security.

How often does CFIUS review foreign investments?

In the wake of the global financial crisis, the number of companies filing transactions with CFIUS has steadily risen, from 65 in 2009 to 240 in 2017. About 40 percent of filings have led to an investigation.

Since the creation of CFIUS, presidents have only blocked deals on five occasions. In 1990, President George H.W. Bush was the first to do so to void the sale of Mamco Manufacturing, a Seattle-based aircraft parts maker, to a Chinese state-owned aviation company. President Barack Obama blocked two: in 2012 he ordered the Chinese-owned Ralls Corporation to divest its interest in Oregon wind farms, citing national security concerns; and in 2016 he blocked the takeover of the German semiconductor company Aixtron by a Chinese company with government ties.

Trump has accelerated the pace, stopping two potential transactions in a little over a year in office. In September 2017 he blocked the sale of the chip-maker Lattice Semiconductor in a deal partially financed by Chinese state-owned capital. And in March 2018, Trump acted quickly on CFIUS warnings that the proposed takeover of U.S. telecom leader Qualcomm by a Singapore-based company would reduce U.S. technological competitiveness and impair national security. The $142 billion deal was by far the largest to be blocked by presidential order.

What role has increasing Chinese investment played?

Lawmakers are increasingly concerned over the growth of Chinese acquisitions of U.S. companies, which have totaled some $117 billion over the past five years. Apart from presidential orders, other high-profile deals have fallen apart under CFIUS scrutiny.

Meanwhile, CFIUS has expanded its review process to apply more oversight to so-called non-notified transactions—that is, deals that had not been registered with the agency. Experts say that this expansion is due both to the growth of cybersecurity issues and warnings by U.S. intelligence agencies that there may be a coordinated effort [PDF] by one or more foreign countries, including China, to acquire U.S. “critical technology companies.”

Some in Congress have cited China as a reason to further expand the oversight power of CFIUS. Legislation proposed in November 2017 would, if passed, greatly expand the number of transactions covered by the agency, including many outbound U.S. investments and joint ventures in foreign countries. One of the authors of the legislation, Republican Senator John Cornyn, says that “China has weaponized investment in an attempt to vacuum up our advanced technologies.” Skeptics of the reforms say that they would overburden CFIUS, hamper the competitiveness of U.S. companies, and dampen the dynamism of the technology sector.

How do U.S. policies on foreign investment compare with the rest of the world?

In a 2016 report [PDF], the OECD noted that countries around the world are reevaluating, and often tightening, their oversight regimes. Most have broadened the scope of what is considered “national security sensitive” to include energy, telecommunications, infrastructure, and health care.

Source: OECD.

As in the United States, governments around the world have raised concerns over record levels of Chinese acquisition activity. The Financial Times reported that nearly $40 billion worth of Chinese foreign acquisition deals in Australia, Europe, and the United States were scuttled in 2015 and 2016 because of either outright rejection or increased regulatory scrutiny.

Recent Chinese acquisition attempts have proven particularly controversial in Australia. The government has stepped up its scrutiny of foreign deals and mandated that all acquisitions of public infrastructure be reviewed by its Foreign Investment Review Board. In April 2016, Canberra rejected a Chinese bid to buy the country’s largest agribusiness. And in August of that year, the government blocked a Chinese consortium from buying an electricity grid operator.

Some European countries have followed suit. In 2014, France began requiring state approval for most foreign bids. Germany, China’s top investment destination in Europe, has seen controversy over Chinese investments in traditional German powerhouses such as automaker Daimler, leading some policymakers to propose expanding the German government’s authority to block such deals. And after taking office in 2016, UK Prime Minister Theresa May promised to strengthen the country’s oversight system.

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